Financial Instruments and Risk Management

9 Months Ended

Sep. 28, 2019

Financial Instruments and Risk Management

The Company uses forward foreign exchange contracts to manage its exposures to movements in foreign exchange rates. The Company also uses a combination of derivative instruments and long-term debt to manage its exposure to foreign currency risk associated with the Company’s net investment in its European subsidiaries.

As of September 28, 2019, the notional U.S. dollar equivalent of the Company’s derivative portfolio of forward foreign exchange contracts was $578,462, consisting of contracts hedging exposures primarily related to the Australian dollar, Euro, Canadian dollar and Mexican peso. As of September 28, 2019, the U.S. dollar equivalent carrying value of long-term debt designated as a partial European net investment hedge was $547,106. The notional U.S. dollar equivalent of the Company’s cross-currency swap contracts, which are also designated as partial European net investment hedges, was $335,940 as of September 28, 2019.

Fair Values of Derivative Instruments

The fair values of derivative financial instruments related to forward foreign exchange contracts and cross-currency swap contracts recognized in the Condensed Consolidated Balance Sheets of the Company were as follows:



	Balance Sheet Location	Fair Value
	Balance Sheet Location	September 28, 2019			December 29, 2018
Derivatives designated as hedging instruments:
Forward foreign exchange contracts	Other current assets	$	7,729		$	18,381
Cross-currency swap contracts	Other current assets	1,672			—
Cross-currency swap contracts	Other noncurrent assets	8,699			—
Derivatives not designated as hedging instruments:
Forward foreign exchange contracts	Other current assets	13,915			12,410
Total derivative assets		32,015			30,791

Derivatives designated as hedging instruments:
Forward foreign exchange contracts	Accrued liabilities	(173		)	(286		)
Derivatives not designated as hedging instruments:
Forward foreign exchange contracts	Accrued liabilities	(313		)	(114		)
Total derivative liabilities		(486		)	(400		)

Net derivative asset		$	31,529		$	30,391

Cash Flow Hedges

The Company uses forward foreign exchange contracts to reduce the effect of fluctuating foreign currencies on short-term foreign currency-denominated transactions, foreign currency-denominated investments and other known foreign currency exposures. Gains and losses on these contracts are intended to offset losses and gains on the hedged transaction in an effort to reduce the earnings volatility resulting from fluctuating foreign currency exchange rates.

The Company expects to reclassify into earnings during the next 12 months a net gain from AOCI of approximately$16,684. The Company is hedging exposure to the variability in future cash flows for forecasted transactions over the next 15 months.

The effect of cash flow hedge derivative instruments on the Condensed Consolidated Statements of Income and AOCI is as follows:



	Amount of Gain (Loss) Recognized in AOCI on Derivative Instruments
	Quarter Ended					Nine Months Ended
	September 28, 2019		September 29, 2018			September 28, 2019		September 29, 2018
Foreign exchange contracts	$	9,970	$	(207	)	$	11,684	$	25,067



	Location of Gain (Loss) Reclassified from AOCI into Income	Amount of Gain (Loss) Reclassified from AOCI into Income
		Quarter Ended					Nine Months Ended
		September 28, 2019		September 29, 2018			September 28, 2019		September 29, 2018
Foreign exchange contracts⁽¹⁾	Cost of sales	$	6,991	$	(2,467	)	$	21,355	$	(9,686	)


(1)	The Company does not exclude amounts from effectiveness testing for cash flow hedges that would require recognition into earnings based on changes in fair value.



	Quarter Ended				Nine Months Ended
	September 28, 2019		September 29, 2018		September 28, 2019		September 29, 2018
Total cost of sales in which the effects of cash flow hedges are recorded	$	1,154,629	$	1,136,040	$	3,208,025	$	3,084,110

Net Investment Hedges

In July 2019, the Company entered into two pay-fixed rate, receive-fixed rate cross-currency swap contracts with a total notional amount of €300,000 that were designated as hedges of a portion of the beginning balance of the Company’s net investment in its European subsidiaries. These cross-currency swap contracts, which mature on May 15, 2024, swap U.S. Dollar-denominated interest payments for Euro-denominated interest payments, thereby economically converting a portion of the Company’s fixed-rate 4.625% Senior Notes to a fixed-rate 2.3215% Euro-denominated obligation.

In July 2019, the Company also designated its 3.5% Senior Notes with a carrying value of €500,000, which is a nonderivative financial instrument, as a hedge of a portion of the beginning balance of the Company’s European net investment.

Changes in the fair value of derivative and nonderivative instruments designated as net investment hedges are recognized in the cumulative translation adjustment component of AOCI, offsetting the translation adjustment of the net investment being hedged. Net investment hedge effectiveness is being assessed and hedge results are being measured on an after-tax basis. The interest component of the cross-currency swap contracts is excluded from the assessment of hedge effectiveness and is initially recorded in the cumulative translation adjustment component of AOCI. This excluded component is amortized in earnings using a systematic and rational method over the term of the cross-currency swap contracts and reported in the “Interest expense, net” line in the Condensed Consolidated Statements of Income. Cash flows from the periodic and final settlements of the cross-currency swap contracts will be reported as cash flows from investing activities in the Condensed Consolidated Statements of Cash Flows because the hedged item is a net investment in a foreign subsidiary, and the cash paid or received from acquiring or selling the subsidiary would typically be classified as investing.

The amount of after-tax gains included in AOCI in the Condensed Consolidated Balance Sheets related to derivative instruments and nonderivative financial instruments designated as net investment hedges and the amount of gains included in the “Interest expense, net” line in the Condensed Consolidated Statements of Income related to amounts excluded from the assessment of hedge effectiveness for derivative instruments designated as net investment hedges are as follows:



	Amount of Gain (Loss) Recognized in AOCI
	Quarter Ended				Nine Months Ended
	September 28, 2019		September 29, 2018		September 28, 2019		September 29, 2018
Euro-denominated long-term debt	$	9,845	$	—	$	9,845	$	—
Cross-currency swap contracts	6,436		—		6,436		—
Total	$	16,281	$	—	$	16,281	$	—



	Location of Gain (Loss) Recognized in Income	Amount of Gain (Loss) Recognized in Income (Amount Excluded from Effectiveness Testing)
		Quarter Ended				Nine Months Ended
		September 28, 2019		September 29, 2018		September 28, 2019		September 29, 2018
Cross-currency swap contracts	Interest expense, net	$	1,672	$	—	$	1,672	$	—


		Quarter Ended				Nine Months Ended
		September 28, 2019		September 29, 2018		September 28, 2019		September 29, 2018
Total interest expense, net in which the amounts excluded from effectiveness testing for net investment hedges are recorded		$	43,091	$	52,795	$	137,672	$	146,988

Mark to Market Hedges

A derivative used as a hedging instrument whose change in fair value is recognized to act as a hedge against changes in the values of the hedged item is designated as a mark to market hedge. The Company uses foreign exchange derivative contracts as hedges against the impact of foreign exchange fluctuations on existing accounts receivable and payable balances and intercompany lending transactions denominated in foreign currencies. Foreign exchange derivative contracts are recorded as mark to market hedges when the hedged item is a recorded asset or liability that is revalued in each accounting period. These contracts are not designated as hedges under the accounting standards and are recorded at fair value in the Condensed Consolidated Balance Sheets. Any gains or losses resulting from changes in fair value are recognized directly into earnings. Gains or losses on these contracts largely offset the net remeasurement gains or losses on the related assets and liabilities.

The effect of derivative contracts not designated as hedges on the Condensed Consolidated Statements of Income is as follows:



	Location of Gain (Loss) Recognized in Income on Derivatives	Amount of Gain (Loss) Recognized in Income
		Quarter Ended						Nine Months Ended
		September 28, 2019			September 29, 2018			September 28, 2019			September 29, 2018
Foreign exchange contracts	Cost of sales	$	(3,055	)	$	(2,241	)	$	(21,813	)	$	16,870
Foreign exchange contracts	Selling, general and administrative expenses	2,546			(445		)	1,625			330
Total		$	(509	)	$	(2,686	)	$	(20,188	)	$	17,200